Unpacking the Budget
Has the first Budget of PM Narendra Modi’s second term laid the foundation for achieving the goal of making India a -trillion economy by 2025?
Why in news?
- Given the mandate Prime Minister Narendra Modi just won, and his own interpretation of that as a message from a country that yearned for change, it was natural to expect his government’s first budget to be one with sweeping reforms aimed at tackling India’s big problems of slowing investment and growth.
- Not surprisingly, Sitharaman has tried, with some success, to get a fix on some of the major pain points. Her bigger success is that she has outlined a roadmap of reforms.
What are the key challenges being faced by the economy?
- GDP growth: The last financial year has witnessed the Indian economy lose growth momentum.
- India’s real GDP growth fell from 7.2% in 2017-18 to 6.8% in 2018-19 — a five-year low.
- In fact, the GDP growth rate in the fourth quarter of 2018-19 was just 5.8% — the lowest in 20 quarters. This weakness was also seen in the so-called high-frequency indicators.
- For instance, auto and consumer goods sales have been slowing down.
- Trade statistics: Similarly, trade statistics continue to be broadly stagnant. Muted exports, in turn, have put pressure on India’s current account deficit, which is close to 2.5% of GDP.
- The notorious twin-balance sheet problem — that of commercial banks and corporate entities —has not yet been resolved fully.
- But perhaps the most worrying aspect, from the perspective of sustaining high growth, is the poor investments rate.
- Growth deceleration is showing up with widespread unemployment, which, at the last count was at a 45-year high. The farm sector, too, is facing considerable distress.
- What limits the government’s capacity is the fact that the fiscal deficit is already above the targeted levels. In other words, the government cannot spend its way out of the current slowdown.
- The uncertainties in the global economy, too, limit growth prospects.
Has the Budget contained the fiscal deficit?
- The fiscal deficit, which reflects the government’s borrowing requirement, was one of the key concerns this year.
- A high fiscal deficit essentially crowds out the private sector from using financial resources.
- In the interim Budget for 2019-20 announced in February, then Finance Minister Piyush Goyal had pegged it at 3.4% of GDP.
- Most expected this number to actually rise. However, the new finance minister surprised everyone by actually pulling down the fiscal deficit for the current financial year to 3.3%.
- While the difference is marginal, it is the signalling that is significant.
- However, most observers want to reserve judgment on the government achieving this number.
- For one, the tax revenue numbers look optimistic especially since revenue growth assumption for the last financial year have not been met.
- Moreover, there is considerable off-budget borrowing that hides the real fiscal deficit number.
Does it boost economic growth?
- This is possibly the most intriguing issue.
- ‘Budget at a Glance’ document: On the face of it, the ‘Budget at a Glance’ document states that the nominal GDP will grow by 12% in the current year.
- If that is taken at face value, and one assumes that the retail inflation this year would range between 3.5% and 4%, then the real GDP will grow at anywhere between 8% and 8.5%.
- If this was indeed the case, then it would be a great achievement, especially since growing at 8% each year is what India needs to achieve the $5-trillion economy goal by 2025.
- ‘Macroeconomic Framework Statement’: However, the ‘Macroeconomic Framework Statement’, also supplied with the Budget documents, gives a significantly different picture.
- It states that the nominal GDP for the current year will be 11%, thus bringing down the real GDP rate to 7%-7.5% range.
- The interim Budget had assumed a nominal GDP growth of 11.5%. As such, this Budget’s growth forecast is unclear.
Has the Budget done enough to address farm distress?
- The widespread agrarian distress in spite of bumper production in recent years has been an area of grave concern.
- With each passing year, PM Narendra Modi’s target of doubling farmers’ incomes by 2022 has been becoming stiffer.
- In the interim Budget, the government finally resorted to providing direct income transfer to the smallest farmers.
- While the Budget allocation for the sector has gone up thanks to PM-KISAN, there were hardly any reform measures to make farming more remunerative.
- The finance minister talked about starting thousands of farmer producer organisations in the next five years.
- She also talked about zero-budget farming.
- However, none of these might be able to achieve a transformative change that many were hoping the government would attempt.
- In the process, the goal of doubling farmers’ incomes looks even more elusive than ever.
Will the Budget lead to greater investment in the economy?
- The government has said it will invest heavily in infrastructure and in the digital economy. The Budget does talk of proposed investments of Rs 100 lakh crore over the next five years in infrastructure, which could be in roads and few other sectors.
- But more clarity on that could perhaps come later after the government finalises the structure of long-term financing and a new long-term development financial institution to fund such projects.
- On the face of it, there does not seem to be any major trigger or incentive for firms to commit more capital.
Will the Budget proposals boost employment?
- For the manufacturing sector per se, there aren’t many proposals that will enhance jobs.
- The government may be betting on global companies coming and setting up mega manufacturing plants in areas such as semiconductor fabrication, solar photo voltage cells, lithium storage batteries by providing investment linked income tax waivers and other indirect tax benefits.
- But such projects under similar schemes have never really taken off the ground.
- A case in point is the Vedanta group’s $10-billion project to set up India’s first plant to make flat panel displays for TVs.
What is the impact on the middle class?
- In keeping with the goal of housing for all, the finance minister announced measures to boost both the demand and supply of affordable housing in India.
- To boost demand, the Budget provided an additional deduction of Rs 1.5 lakh for interest paid on loans for an affordable house that is valued up to Rs 45 lakh.
- This is in addition to the existing interest deduction of Rs 2 lakh.
- This implies that a person purchasing an affordable house can now avail of an enhanced interest deduction of Rs 3.5 lakh.
- The Budget has also proposed that public infrastructure and affordable housing be taken up on land parcels held by the Centre. This could help boost the supply of affordable housing.
- On the other hand, the finance minister announced higher taxes on petrol and diesel. Consequently, consumers will have to pay roughly Rs 2.50 per litre of petrol and diesel.
How have the financial markets reacted?
- The Budget failed to cheer investors, with the markets ending the day in the red. The S&P BSE index, which had zoomed past the 40,000 mark during the day, fell over 500 points from the day’s high, ending the day almost a per cent lower at 39,513.
- The Advances-to-Declines ratio for the National Stock Exchange (NSE) was 476 advances to 1,265 declines. Most sector indices ended the day in the red.
- The only exceptions were the Nifty PSU bank index and the Nifty Bank index, which gained after the announcement of a capital infusion of Rs 70,000 crore. The Nifty PSU bank index ended the day at 3,303, up 0.18 per cent from its previous close.
Did the Budget break new ground?
- In a way, yes, with the government’s decision to borrow from the international debt markets for the first time.
- That’s a move which has been in the making for a couple of decades but on which successive governments could never move ahead. In the past, the Reserve Bank of India has not been too enthusiastic about it.
- The move will help establish a benchmark yield for Indian bonds and this is likely to impact corporate borrowings as well.
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